Moody's: Credit pressure on Local Governments More Acute in Rhode Island

Local governments in Rhode Island are experiencing economic weakness, revenue stagnation, and pension expense growth that are more acute than in most other states and are likely to persist into the future, says Moody's Investors Service in a new report, “Rhode Island Local Governments Face Elevated Credit Pressure.”

Government revenues are strained because of decreasing taxable values, the implementation of a statewide tax levy cap, and consecutive state cuts in local aid. Rhode Island’s exposure to pending federal budget cuts also remains high.

Rhode Island local governments get most of their revenues from property taxes and state aid, which continue to stagnate and decline as the state’s economy lags the weak national recovery. According to Moody’s, there is a higher probability than most other states that Rhode Island will experience a double-dip recession, which portends continued stress on most sources of local government revenues.

Rhode Island has a program to provide increased oversight of local governments in distress that could help mitigate credit deterioration for the most challenged municipalities such as Central Falls (rated Caa1/negative outlook). Other mitigants for local governments include an exemption from the property tax limit for general obligation debt, and there is no use of variable rate debt or swaps.

"However, the oversight program is relatively new and untested, and could be overwhelmed by multiple unanticipated local governments seeking state assistance at the same time," said Galluccio.

In anticipation of the Central Falls bankruptcy, the state enacted new legislation that provides a priority secured pledge for general obligation debt, putting such debt ahead of unsecured obligations. The bankruptcy court will ultimately decide if the legislation will stand.